Thursday, June 14, 2012

…the echo chamber

By kay.e.strong

By definition, the echo chamber effect refers to any
situation in which information, ideas or beliefs are amplified or reinforced by
transmission inside an “enclosed” space. One outcome of the echo chamber effect
is to give credence to false claims through sheer volume of repetition. The Bush-Era tax cuts exemplify such an effect transmitted
inside the enclosed “politicking” space.

To understand the echo chamber effect of the Bush-Era tax
cuts, we must revisit the period from which they sprang, the triggering events, their specific provisions and gross incongruence with reality.

First, the rationale for the 2001 tax cuts was to provide “tax
relief” by returning excess federal budget surpluses to American taxpayers. The tail end of the 120-month expansion which
began in March 1991 had been very generous to the government coffers,
generating more federal tax revenue than expenditure. However, what the administration had not
anticipated was a pending turning point in the economy. Leading up to 2000, Y2K loomed larger than
life. The business sector responded to
the hype by ramping up spending on new equipment and software: +14.5% (1998)
and +14.1% (1999). Then, having
navigated the event successfully, businesses quite logically reduced spending
(10.5% in 2000) which triggered the mini dot.com bust (2000-2001). In 2001, businesses throttle back spending further
with a -2.8 percent drop—split between a -1.5% on plant facilities and a -3.2%
in purchases of equipment and software.
Unfortunately, a positive feedback loop gained momentum in 2002 with the
business sector responding to the dot.com bust by further slashes in spending (-17.7%
on plant expansion and another -4.2% on equipment and software).

Intermeshed with the Y2K (2000) and dot.com bust (2000-2001)
was September 11th (2001). However, despite all the press, September
11th does not figure prominently into the eight-month 2001 downturn.
According to the National Bureau of Economic Research that brief downturn running
from March 2001 (peak) to November 2001 (trough) was followed by a healthy 73
month expansion.

Interestingly, all other economic sectors sans business
registered positive spending growth from the end of the 1991 (November)
downturn through December 2007, the onset of the next eighteen-month
contraction. An economic expansion,
albeit slow, has been underway since June 2009.

The Bush-Era tax cuts typically refer to two different
pieces of legislation which both the President and his fellow Republicans had envisioned
to be permanent revision to the tax code. The first known as the Economic
Growth and Tax Relief Reconciliation Act (EGTRRA) signed into law in June 2001,
phased in lower tax rates over a period of nine years, provided a 2001 rebate
($300/ $500/ $600) for qualified taxpayers based on their 2000 earnings, while
simplifying retirement and qualified plan rules for IRAs, 401(k), 403(b) and
pension plans. The unanticipated sunset—reversion to earlier status—provision was
scheduled for end of 2010.

More specifically, the 2001 legislation provided for the
following changes:

Individual
Income Tax Rates to be eliminated in 2011:

Bottom Income
Bracket: a new 10% bracket for single
filers applied to first $7,550 for individuals and $15,100 for
couples

The 15% bracket's lower threshold indexed
to the new 10% bracket

The 28% bracket lowered to 25%

The 31% bracket lowered to 28%

The 36% bracket lowered to 33%

Ultra-high Income Bracket: the 39.6%
bracket lowered to 35%

Marriage Penalty: Increased the standard deduction for joint
filers from between 174% to 200% of the deduction for single filers to be
eliminated in 2011.

Estate Tax/ Gift Tax/ Generation-skipping Tax: top rate
gradually reduced from 55% in 2001 to 45% in 2007; estate tax credit
exclusion gradually increased from $675,000 in 2001 to $3.5 million in
2009. In 2011, tax to be reinstated
with top rate of 60% and $1 million exemption.

Alternative Minimum Tax (AMT): Increased the exemption to
$40,250 for individuals and $58,000 for couples.

Created a new depreciation
deduction for qualified property owners

The second revision, known as the Jobs and Growth Tax Relief
Reconciliation Act (JGTRRA) introduced into the House in February 2003, was
signed by Bush into law in May 2003. This legislation, while accelerating the
individual credits and rate reductions in the 2001 Act, attacked the perceived
obstacles standing in the way of pump up business expansion. Taxpayers were permitted to deduct the full
cost of specific items from their income without having to depreciate the
amount. Capital gains tax decreased
from rates of 8%-10%-20% to 5 and 15%.

Contrary to the echo chamber, the original legislation had
NOTHING to do with jump starting the economy! In fact, the economy had been so healthy that despite
government’s best spending efforts—it generated four successive years of
federal budget surpluses! Republicans seizing the opportunity rammed through “tax
relief” for the ultra-rich—who else could take advantage of the Estate Tax/ Gift Tax/ Generation-skipping
Tax, the Alternative Minimum Tax,
an Income Tax break on par with the pre-relief
rate of the middle-class, as well as Capital
Gains Tax reductions?

The rationalizing echo in the political rhetoric-de jour for extending the
Bush-Era tax cuts is just as disingenuous as the then-President Bush in his 2006
State of the Union address: “I urge the Congress to act responsibly and make
the tax cuts permanent…and stay on track to cut the deficit in half by 2009”—which,
incidentally, hit its historic hit—a trillion point four dollars in 2009!

I have to wonder, what might our political reality look like if politicians of all colors stretched their necks outside the echo chamber?

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